Navigating the tax system: a guide for retailers

Taxes are an inevitable aspect of running a retail business in the UK, shaping financial decisions and operational strategies. Business tax rates, including corporation tax, VAT, and business rates significantly impact the profitability and sustainability of retail businesses.

Understanding the nuances of business tax rates is essential for retailers to manage their finances effectively and ensure their compliance with legal obligations.

Corporation tax

Corporation tax is a direct tax on the profits generated by companies operating within the UK and foreign companies with a permanent establishment in the UK.

For retailers, this tax applies to the profits earned from the sale of goods, services, and other revenue streams. 

From 1 April 2023, the current corporation tax rate in the UK is 25% for companies with profits over £250,000. 

It’s important for retailers to accurately calculate their taxable profits by deducting allowable expenses and deductions from their total income. It’s also important for retailers to stay informed about any changes to the tax rate, as it may fluctuate in response to economic conditions or government policies.

Small profits rate

The UK government offers a lower rate of corporation tax, known as the “small profits rate,” to support small businesses and startups. This rate applies to companies with profits below £50,000. Since 1 April 2023, the small profits rate also stands at 19%, aligned with the standard corporation tax rate. 

Retailers operating as small businesses can benefit from this reduced rate, allowing them to retain more of their profits for reinvestment or expansion. However, retailers should monitor changes to the small profits rate and ensure compliance with eligibility criteria to qualify for this reduced tax treatment.

Taxable profits and allowable deductions

Retailers must accurately calculate their taxable profits by deducting allowable expenses and deductions from their total income. Allowable expenses may include costs related to purchasing inventory, renting or leasing retail premises, employee salaries, marketing expenses, utilities, and other overheads incurred in the course of operating the business. 

By maintaining detailed financial records and documentation, retailers can maximise their allowable deductions and minimise their taxable profits, thereby reducing their overall tax liability.

VAT (Value-added tax)

In addition to corporation tax, retailers must also contend with VAT, a consumption tax levied on the value added at each stage of the supply chain. 

Most goods and services provided by retailers are subject to VAT at the standard rate of 20%, although certain items may qualify for reduced rates (5%) or exemptions. 

Retailers with annual VAT-taxable turnover exceeding the VAT registration threshold (currently £90,000) are required to register for VAT and charge VAT on their sales. However, VAT-registered retailers can reclaim VAT paid on their business expenses, mitigating the impact of VAT on their overall tax burden. 

Therefore, it’s important for retailers to maintain accurate VAT records, submit timely VAT returns, and comply with VAT regulations to avoid potential fines or penalties.

Business rates

Business rates are another significant tax consideration for retailers, representing the property tax payable on non-domestic premises used for business purposes. 

The rateable value of a property, set by the Valuation Office Agency (VOA), serves as the basis for calculating business rates. 

Retailers must pay business rates annually to the local authority where their premises are located. However, certain retail properties may qualify for business rates relief, particularly small businesses occupying properties with a rateable value Between £12,001 and £15,000, or exemptions, in case the rateable value is below £12,000.

Retailers should regularly review their business rates assessments, explore potential reliefs or exemptions, and budget for business rates payments as part of their overall financial planning.

A note on online retail and digital services tax

With the growing prominence of online retail and digital services, the UK government has introduced measures to address tax challenges in the digital economy. 

The Digital Services Tax (DST) is a relatively new 2% tax imposed on revenues generated from certain digital services provided by large multinational companies, social media platforms and online marketplaces. DST is forecast to raise around £3bn by 2024-25.

Retailers engaged in digital commerce should review their digital revenue streams, assess their liability under the DST, and implement appropriate measures to comply with tax regulations governing digital services.

Tax planning and compliance

Overall, effective tax planning is essential for retailers to optimise their tax position while ensuring compliance with legal requirements. Retailers should assess their business structure, operations, and financial transactions to identify opportunities for tax optimisation and risk mitigation. 

Navigating business tax rates is a critical aspect of managing a retail business in the UK. Getting the help of professional tax advisors or accountants with expertise in retail taxation can provide valuable insights and guidance tailored to the specific needs and circumstances of retailers.